Watch for the signal, not for the action

June 18, 2014 00:00
By Dr Benjarong Suwankiri

Mark Carney's comments on the UK's rate direction last week brought back the spectre of QE tapering, witnessed last year.

Against the backdrop of rising asset prices and growing mortgage debts, the Bank of England remarked that the rise of its bank rate, presently at 0.5 per cent, could “happen sooner than markets currently expect”.

Surveys indicate that markets had expected the first rate rise sometime in March or April of next year. The speech apparently brought forward the date to the realm of this year-end, a sharp shift in expectation.

In response, the pound strengthened 0.3 per cent against the greenback and 0.15 per cent against the euro. The FTSE100 fell nearly 1 per cent the day after the announcement, with the biggest fall in the construction and real estate sectors, about 2.6-3.0 per cent in one day. All in all, this means the good times of cheap money are over.

Though one may argue that the UK market may not be of interest to many Thai businesses, there is something to be learned here. Reminiscence with the QE tapering fear in 2013 – the trend in global monetary policy is tightening.

The era of free liquidity is over, as QE tapering is now a thing of the past.

Next in line to go is the era of cheap liquidity, and the window of opportunity is closing quickly.

Now the markets anxiously await the rise of the federal funds rate, which likewise is guaranteed to come sooner or later. A Bloomberg survey indicates that the perceived probability of a 0.5 percentage point or more rise in the fed funds rate next year is almost 90 per cent, while the latest survey of FOMC members placed the year-end target for the fed funds rate at 1 per cent, a significant increase from the current 0-0.25-per-cent level. It seems clear that it is now only a matter of when.

But are we asking the right question? In various meetings with clients and investors, the most often-heard question is when will the fed funds rate go up.

Unfortunately, none of these will help you manage your business and risk better. Why?

Because the actual implication of the rate rise will matter relatively less on the day of the rise, and a whole lot more on the signalling day and the subsequent period.

Just like what Mark Carney has done for the UK’s bank rate, the Federal Reserve and its chairwoman may choose to signal to the market anytime their intention and that will move the markets, regardless of the actual date of implementation.

In other words, stop speculating on the time of the Fed’s action and start following closely the signal from the Fed. That too may come sooner than expected.

Expect no difference this time. The Fed will test the water well before the actual rate hike day. During such a period, also expect highly volatile foreign exchange, bond and stock markets. They will flip flop between certainty in negative adjustment, and vagueness in positive “not yet” sentiment.

The difficult part is, not one knows when the optimal signalling time is. It could be well-planned or it could be a slip of the tongue followed by heavy interpretation. It may be as early as the fourth quarter of this year, but more definitely no later than the first quarter of next year.

There is no economic model to predict this – not here, not there, not anywhere. Hence, a word of advice. Watch out for the signal and hedge your risk before it’s too late. We have unwillingly bought the ticket for another ride. It’s just not sure when the ride will begin.

Views expressed in this article are those of the author and not of TMB Bank or its executives.

_ Benjarong Suwankiri, head of TMB Analytics, the economic analysis unit at TMB Bank, can be reached at tmbanalytics@tmbbank.com.

Against the backdrop of rising asset prices and growing mortgage debts, the Bank of England remarked that the rise of its bank rate, presently at 0.5 per cent, could “happen sooner than markets currently expect”.

Surveys indicate that markets had expected the first rate rise sometime in March or April of next year. The speech apparently brought forward the date to the realm of this year-end, a sharp shift in expectation.

In response, the pound strengthened 0.3 per cent against the greenback and 0.15 per cent against the euro. The FTSE100 fell nearly 1 per cent the day after the announcement, with the biggest fall in the construction and real estate sectors, about 2.6-3.0 per cent in one day. All in all, this means the good times of cheap money are over.

Though one may argue that the UK market may not be of interest to many Thai businesses, there is something to be learned here. Reminiscence with the QE tapering fear in 2013 – the trend in global monetary policy is tightening.

The era of free liquidity is over, as QE tapering is now a thing of the past.

Next in line to go is the era of cheap liquidity, and the window of opportunity is closing quickly.

Now the markets anxiously await the rise of the federal funds rate, which likewise is guaranteed to come sooner or later. A Bloomberg survey indicates that the perceived probability of a 0.5 percentage point or more rise in the fed funds rate next year is almost 90 per cent, while the latest survey of FOMC members placed the year-end target for the fed funds rate at 1 per cent, a significant increase from the current 0-0.25-per-cent level. It seems clear that it is now only a matter of when.

But are we asking the right question? In various meetings with clients and investors, the most often-heard question is when will the fed funds rate go up.

Unfortunately, none of these will help you manage your business and risk better. Why?

Because the actual implication of the rate rise will matter relatively less on the day of the rise, and a whole lot more on the signalling day and the subsequent period.

Just like what Mark Carney has done for the UK’s bank rate, the Federal Reserve and its chairwoman may choose to signal to the market anytime their intention and that will move the markets, regardless of the actual date of implementation.

In other words, stop speculating on the time of the Fed’s action and start following closely the signal from the Fed. That too may come sooner than expected.

Expect no difference this time. The Fed will test the water well before the actual rate hike day. During such a period, also expect highly volatile foreign exchange, bond and stock markets. They will flip flop between certainty in negative adjustment, and vagueness in positive “not yet” sentiment.

The difficult part is, not one knows when the optimal signalling time is. It could be well-planned or it could be a slip of the tongue followed by heavy interpretation. It may be as early as the fourth quarter of this year, but more definitely no later than the first quarter of next year.

There is no economic model to predict this – not here, not there, not anywhere. Hence, a word of advice. Watch out for the signal and hedge your risk before it’s too late. We have unwillingly bought the ticket for another ride. It’s just not sure when the ride will begin.

Views expressed in this article are those of the author and not of TMB Bank or its executives.

_ Benjarong Suwankiri, head of TMB Analytics, the economic analysis unit at TMB Bank, can be reached at tmbanalytics@tmbbank.com.